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Are Penny Stocks Worth It?

Penny stocks have always been alluring. Countless movies and books have emphasized the various ways to get rich with small investments. The rags to riches stories involving making money with penny stocks are prominent in popular culture.

It’s true, a small investment in a company with a stock price under $5 can turn into a huge windfall. It’s also important to keep in mind that this is still an investment.  All investments carry certain amounts of risk as well.

are penny stocks worth it
Penny stocks, in particular, carry their own risk profile, unlike most other investment options. There are several reasons as to why. For starters, penny stocks are small-cap and micro-cap companies. This means that the market capitalization for these companies is much smaller than their blue-chip counterparts.

With smaller companies, you have to consider that the stocks themselves are thinly traded. Big bursts of buying or selling can send penny stocks hurdling in one direction or another, quickly.

How Much Money Can I Make With Penny Stocks?

Here and there you’ll hear about people making money with penny stocks. Depending on who you’re talking to, this “money” can be small. For some of the new traders out there, a 100% move is great, but when it’s 100% on a $50 position, it may not appear as a “big money” trade. Needless to say, it all comes down to managing risk. 

Perspective plays a big role. Specifically, with penny stocks, most will stick to a rule of thumb to not risk more than they can afford to lose.  This means that if you wouldn’t bat an eye at losing $100 but losing $1000 could hurt your pocket, starting with $100 may be the best route.

make money with penny stocks
But how much money can you make with penny stocks? The short answer is that it is based on your own risk profile.  Anyone can say that you can make unlimited amounts of money with penny stocks. But realistically, there is a cap based on how high a stock moves. Furthermore, it’s also based on how much you’re willing to invest. It’s much harder to make $1000 profit with $100 invested than it is with $1000 or more invested.

Remember To Have A Plan

It all boils down to having a proper trading strategy and plan in place.  If you treat the stock market like the lottery, then you’ll likely win at trading just as much you win at playing the lottery. For the vast majority, the likelihood of winning the lotto multiple times is slim (just putting it out there).

[READ MORE] How To Buy Penny Stocks On Robinhood

But what do I mean by having a plan? For starters, you may want to focus on companies that you understand better than others. Trust me, making a big score off of a stock that you know nothing about and just play the momentum is great. But it’s very hard to duplicate.  On the other hand, let’s say you understand the mining sector very well. You know how geopolitical risks can impact these stocks.
And let’s say that you just read something about the Fed lowering interest rates for banks, while global trade could see a shakeup. Sound familiar? If you understand how gold trades, then you may see the opportunity in buying penny stocks in the sector.

Penny Stocks: Avoid Trading On Hype Alone

On the flip side, if you don’t understand mining, you’re likely to be trading based on sentiment or hype seen on social media. This is a very dangerous position to be in. There are a number of risks in this case. First, the people you are listening to may have already bought shares of the penny stock they’re hyping.
There’s a good chance they’re selling as they are hyping up the stock. In this case, if buying volume dries up, you could get trapping in a stock that has a bearish fate lying ahead. Another risk of buying penny stocks based solely on sentiment is that you may not understand outside catalysts that may signal it’s time to sell.

[Related Article] How To Find The Best Penny Stocks To Buy

Let’s go back to the gold example. If rates are set to decrease and everyone is rallying behind gold, great. But if rates don’t decrease or decrease by less than expected, it could be negative. If you don’t understand the psychology of trading gold, this even may go right over your head. The result is you could lose your profit or be stuck holding worthless shares.

Avoid Unnecessary Risk

Sometimes it’s better to sit on the sidelines than make every single trade out there. Let’s face it, when it comes to penny stocks, there are plenty of big movers out there. In fact, there could be 10 or more money-making penny stocks to buy in a single day. But timing is important.
When did you see the stock, initially? Was it already trading near its highs, was it already on its way down, what did it look like? If you don’t understand the reasons some penny stocks are breaking out, it may be better to hold your cash instead of risk it because you’re afraid of missing out.

penny stocks
FOMO – fear of missing out – is one of the biggest reasons investors lose money with penny stocks. Just because you don’t participate in a trade, doesn’t mean you’ll never see another good trade again. In fact, it’s just the opposite. On an almost daily basis, there are plenty of breakouts from a number of penny stocks.

But it’s important to treat your cash just like a position. The trade-off between holding cash instead of risking it on a highly speculative, high volatility trade you know very little about is big. Bottom line, no one ever went broke taking profit and no one ever lost money by holding onto cash positions.

Are Penny Stocks Worth The Risk?

At the end of the day, the choice is yours. Penny stocks are very speculative, highly volatile, and investments, in general, don’t guarantee you a profit. There are degrees of risk involved. But at the same time, if you ever wanted to make money with penny stocks, you have to educate yourself on this class of equities.
Learn the ropes first. Do things like paper trading, learn from a real mentor, and take your time. Just as I said above, there’s never a shortage of stocks breaking out.  Check out this article to get started in the world of penny stocks: How To Make Money With Penny Stocks

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